Kelman: Time to share savings

By Steve Kelman

Apr 05, 2004

A huge frustration to anybody interested in a procurement system that delivers better value for agency missions and taxpayers is how slowly the use of share-in-savings contracting is spreading. It has been used more at the state and local levels than the federal level.

Share-in-savings contracts pay only for success  contractor payment is based on the savings that a contract delivers. The result is that the greater the savings, the greater the payment to the contractor. By contrast, failure is punished with no, or significantly less, money in the contractor's pocket.

This procurement method is a superb example of how one can structure a business relationship to promote successful contractor performance. But the current climate has not favored innovative approaches. Rather, the Bush administration has spent three years encouraging federal contracting people to retreat into a bureaucratic cocoon.

People such as Sen. Charles Grassley (R-Iowa) spend their time harassing agencies about trivial scandals, such as the purchase of construction under information technology contracts, oblivious to the climate of hypercaution and fear these tirades engender. Meanwhile, opportunities languish that our contracting workforce could pursue to help agencies and taxpayers.

New techniques such as share-in-savings are seen as risky. Yet familiar, commonly used contracting methods such as time-and-materials purchases, in which contractors are paid whether or not they perform, are far more risky. Share-in-savings contracts create a situation in which the contractor, not the government, bears the risk of failure.

In the current climate, the efforts of officials at the General Services Administration and its share-in-savings program office are a shining light. Everyone interested in share-in-savings initiatives realizes the government badly needs some quick, easy wins to help overcome the cautiousness pervading the system.

I have a suggestion for a priority area for GSA  reverse auctions as a technique to buy items, whether products or services, that the government needs on a recurring basis. The benefit is clear in the savings that the government achieves using reverse auctions, in which companies compete to provide a service or product at the best value, compared with the previous time the government bought the product or service.

So if the government had spent $500,000 on an item and gets it using reverse auctions for $400,000, the savings pool would be $100,000. The reverse auction vendor would be paid a percentage, determined through a competition among vendors, of those savings.

By way of full disclosure, I should state that I do some consulting work for FreeMarkets Inc., a reverse auction vendor.

Using share-in-savings for reverse auctions has the potential to jump-start the spread of share-in-savings in government.

Kelman is a professor of public management at Harvard University's Kennedy School and former administrator of the Office of Federal Procurement Policy. He can be reached at steve_kelman@harvard.edu.